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A Discussion Prepared for

A Discussion Prepared for. February 10, 2009 Presented By. Glen Volk, FSA, MAAA Consulting Actuary. Agenda. Review of GASB 45 Requirements Summary of Key GASB 45 Results Options for Managing GASB 45 Expenses. Summary of GASB 45 Requirements. GASB 45 Requirements.

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A Discussion Prepared for

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  1. A Discussion Prepared for February 10, 2009 Presented By Glen Volk, FSA, MAAA Consulting Actuary

  2. Agenda • Review of GASB 45 Requirements • Summary of Key GASB 45 Results • Options for Managing GASB 45 Expenses

  3. Summary of GASB 45 Requirements

  4. GASB 45 Requirements • Requires accrual accounting for Other Post Employment Benefits (OPEB) • Conceptually the same as accounting for a defined benefit pension plan • Primary benefit is retiree medical • Currently financed on a pay-as-you go basis (2007/08 pay-as-you-go cost $1,088,000) • Phased in implementation – 2008/09 for Phase 2 employers

  5. GASB 45 Requirements • Perform actuarial valuation • Recognize cost (Annual Required Contribution, or ARC) of retiree medical benefits equal to: • Value of benefits earned by active employees [Normal Cost], plus • Amortization of existing unfunded actuarial accrued liabilities [AAL] • Disclose information about the plan, including the value of plan assets and liabilities

  6. GASB 45 Requirements Valuation Assumptions Retiree Contributions Trend Turnover Actuarial Cost Method Discount Rate Retirement Rates Participation Rates

  7. Summary of Key GASB 45 Results

  8. Summary of Key GASB 45 Results Example of Implicit Subsidy

  9. Summary of Key GASB 45 Results Valuation Results as of July 1, 2007

  10. Summary of Key GASB 45 Results Comparison of Funded and Unfunded Scenarios

  11. Summary of Key GASB 45 Results • Based on feedback from auditors • Unfunded Plan – assume discount rate of 5% (based on long term rate of return on General Fund assets used to satisfy obligation) • Funded Plan – assume discount rate of 8% (based on assumed long term rate of return on Trust assets) • Higher discount rate means less value is given to future payments. This is what causes the AAL and ARC to be lower. Difference in Assumptions for Funded and Unfunded Scenarios

  12. Options for Managing GASB 45 Expense

  13. Options for Managing GASB 45 Expense • Status Quo • Make Minimum Annual Required Contributions • Reduce Plan Expenses Eligibility  Plan Design  Contributions  Medicare Advantage & PDP • Fund All or part of OPEB Liability From Any Legally Available Funds or by Issuing OPEB Bonds General Approaches/Options

  14. Options for Managing GASB 45 Expense • Limitations: Contracts, State Statutes and Collective Bargaining Agreements. • Plan Changes may include: • Eligibility • Contributions (Most critical) • Co-pays, deductibles • Defined contribution plan • Medicare Advantage & PDP Reduce Plan Expenses

  15. Options for Managing GASB 45 Expense • Advantages of Funding: • Use higher discount rate (lower AAL and ARC) • More favorable treatment from rating agencies • Higher degree of safety for current and future retirees • Disadvantages of Funding • Ties up more cash • Time and expense required to operate a trust Funding Considerations

  16. Questions?

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